Student loan rates need fixing

Monday

Jun 3, 2013 at 6:00 AM

Clive McFarlane

Recently a diverse national group of college and foundation presidents, civil rights leaders, state policy-makers, business leaders and others released a report titled “The American Dream 2.0,” which took a look at the financial aid system and offered suggestions for improving it.

Among its findings, the group discovered that 46 percent of students who enroll in an institution of higher learning do not graduate with any credentials within six years. The rate was 63 percent for African-Americans and 58 percent for Hispanics.

Meanwhile, annual student borrowing over the past 10 years jumped from $56 billion to $113 billion, with the average debt per borrower around $26,600.

“Burdened with such debt, many students without a credential are plunged under water financially,” the report noted.

“Indeed, the average default rate for those with no credential is more than four times the rate for those with a bachelor’s degree.”

The report presents a cold, sobering window on our national financial aid scam (my characterization) that currently mostly benefits bankers and institutions of higher learning.

The need to change the system, however, has largely gone unspoken in the current wrangling between President Obama and House Republicans over federal student loan rates. The 3.4 percent interest rate on federal subsidized loans, a rate set by Democrats before the Republicans took control of the House in 2011, will balloon to 6.8 percent on July 1 unless lawmakers agree on a less onerous rate.

House Republicans have passed a bill tying the student lending rate to the interest rate of 10-year Treasury notes, with an additional 2.5 percentage points for Stafford Loans. The bill would cap interest rates on these loans at 8.5 percent.

President Obama’s plan would also tie the interest rate on Stafford loans to the 10-year Treasury note with additional 0.93 percentage points for subsidized loans, a rate that would remain fixed for the life of the loan. He would also tie unsubsidized federal loans to the 10-year Treasury note, with an additional 3 percentage points.

“Higher Education cannot be a luxury for a privileged few,” Mr. Obama said Friday in pushing his plan.

“It is an economic necessity that every family should be able to afford, every young person with dreams and ambitions should be able to access.”

There is no question that a person without post-secondary education is at risk in our economy. The Dream 2.0 report found, for example, that four out of the five jobs lost to the recession were held by Americans without a credential.

But like many political skirmishes, this one is missing the point. Loan rates are not the major issue facing students already burdened by college loan debt, or those who want to pursue a college education.

“Providing financial aid and just hoping for student success is not enough,” the authors of “The American Dream 2.0” noted.

Policy-makers, according to the authors of the report, should focus on helping students complete a credential with value to themselves and the economy. Institutions of higher learning, states and students should be held accountable for students completing their credential, they said.

I would add that colleges and universities should be held responsible for helping their graduates secure meaningful work upon graduation. We should also expand vocational education for those kids who do best by first acquiring a marketable skill, and then, if necessary, supplement their training with post-secondary education.

We have a moral obligation to keep student loan rates low for families without much means, but low loan rates without the structural changes recommended above do not help the student, the economy or the country.